Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

Private sector debt is a burden, not an economic benefit

By David Kauders - posted Wednesday, 24 February 2021

Those of us who question the wisdom of economic policies, seek to understand whether endless credit creation is always such a good idea. Governments can indeed borrow very cheaply, but private borrowers – businesses and households – usually pay more. Australian private debt is now 200% of GDP (Gross Domestic Product, a measure of the size of the economy), some four times the level of public borrowing. Does this private sector debt affect economic growth?

To answer this, it is necessary to know how much economic output is spent on interest. When I first investigated this some three years ago, I searched the literature in vain. Nobody had considered the economic effect of this expense. Therefore, I tried to build an estimate at a global level. What I found, using pre-pandemic data from 2018, was that world economic output was then around USD 80 trillion. The best figure I could calculate for interest cost was USD 17 trillion. One-fifth of economic output.

Tracing back for about forty years, interest rates paid to depositors have fallen, while real costs incurred by borrowers other than governments have risen. Real interest cost is the rate paid by borrowers minus the inflation rate, which itself is stuck at historically low levels. This cost is positive for the private sector globally, whereas some governments can borrow at less than inflation. Higher real private borrowing costs may be the reason why many economies were sluggish before the pandemic arrived.


The reasons why private borrowers face such rising costs are not hard to find:

1. Banks have incurred greater loan losses, which must be paid for by all borrowers.

2. Banks have also faced their own financial squeeze from falling deposit rates, because their net margin – the amount they earn on money taken in – has fallen.

3. Society has sought to control its banks by imposing more onerous regulations, causing the cost of compliance to further increase rates charged to borrowers.

This unrecognised private sector debt overhead, which I call the financial system limit, has now become a barrier to economic growth. There are three radical ideas underlying this concept:

a) There is indeed a limit to the growth of debt and hence to credit expansion.


b) The world is well on the way to reaching this limit.

c) Central banks have created a new, dominant economic cycle that transcends traditional economic cycles.

Every stimulus release causes a new downturn perhaps a decade later, as the costs of borrowing overwhelm the initial benefit of extra money injected into economies.

  1. Pages:
  2. Page 1
  3. 2
  4. All

The Financial System Limit is published by Sparkling Books, ISBN 9781907230783 ($A 20). There is also an e-book 9781907230776. The introduction and first chapter can be read without registration at

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

37 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

David Kauders , is an investment manager. He is the author of The Greatest Crash: How contradictory policies are sinking the global economy. and the newly released book, The Financial System Limit ‒The World’s Real Debt Burden, which shows that creating more private sector debt eventually leads to economic decline.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of David Kauders
Article Tools
Comment 37 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy